May 6, 2005--The quarter percentage point hike in the interest rate by the Federal Reserve is likely to further affect small businesses, already bearing the brunt of soaring energy costs and inflation.
The hike in interest rates is the eighth consecutive one and has pushed the federal funds rate to 3%.
Small businesses that will be affected most tend to be debt oriented, especially in sectors like manufacturing, said Brian Headd, economist at the Office of Advocacy, U.S. Small Business Administration (SBA).
The Fed has been gradually hiking rates by a quarter point since June last year, pushing it up from its 1958-low of 1% to the current 3%. The improvement in the job market has reduced the pressure on the Feds to stimulate activity by maintaining interest rates at below normal levels, said economists.
The gradual and small increase in interest rates could mitigate some of the shock to borrowers, said Headd. "Historically, small rises by the Fed over a prolonged period haven't had much impact," he said.
Though small businesses are being squeezed by the interest rates, they have not put off their expansion plans nor has their appetite for loans been affected.
A survey by the National Federation of Independent Business (NFIB) in early 2003 indicated that 15.7% of business owners said that the next three months would be a good time to expand. By 2004, when the Feds started implementing their hikes, the number had gone up to 22.4% and currently, despite the hikes, the number has remained almost the same.
The optimism among small business owners is supported by a Federal Reserve survey of approximately 60 large domestic banks and 24 U.S. branches of foreign banks. The quarterly survey, the Senior Loan Officers Opinion, showed a continued increase in the demand for loans from small businesses.
"Interest rates are just one factor when it comes to expansion. The other one is the demand for goods and services, which is growing," said Headd.
Economists say that the central bank is likely to hike the interest rates gradually over the next few months until it reaches 4%. With the expectation that the hikes will continue, Headd suggested that small businesses lock in their interest rates to insulate themselves.